Prosper and Collections Agencies

One of the big differences I see between Prosper and conventional investing is its personal nature. Some people like that—it’s fun for them to help people fund their dreams or repay their debt. Tricia at Blogging Away Debt used Prosper to consolidate some of her debt at a better rate. Very exciting for her!

I have to say that part makes me really uncomfortable. I’m sure there are ethical debt collectors out there, but one hears so many horror stories. In particular, Micah was traumatized as a child by threatening debt collectors (he’s still afraid to answer the phone).

While traditional investing isn’t perfect either, at least one can (probably) avoid the possibility of setting a collections agency on someone. I just don’t want to be involved in that.

As I was musing on this, I came up with a few answers which might make lenders feel more comfortable:

1. There are certainly a number of responsible borrowers on Prosper (like Tricia!), no reason that you’ll necessarily get a default.

2. Lend only to high-grade borrowers (A or AA) because they have such a low chance of default.

3. Maybe Prosper works with more ethical debt collections agencies? One would hope they’d taken the time and specified that if the agents start threatening/harassing/or doing anything illegal towards Prosper borrowers, the agency will lose its contract.

I like #2 best.

What are the implications of choosing high grade borrowers?

If I stuck to high grade borrowers to avoid the chance of default and conscience troubles, then I wouldn’t get the same kind of returns as I might be lending to someone with a C or D. Does Prosper then lose its worth to me? Might I do better with a CD?I’d probably use the experimental section of my portfolio (yeah, haven’t got one of those yet) and I wouldn’t expect it to earn much more than a good CD or Money Market. I’d frame it as a combination of making money and helping people out…

I think that the best way to make money on Prosper is by hoping the collections agencies are decent folks and going with a wide mix of borrowers. I’m just not able to do that.

Postscript: Oh, and if you do want to sign up with Prosper, check out my left sidebar.

Personally, I planned to lend only to A and AA. Unfortunately, the portfolio plan assigned me to B with delinquencies. I don’t think it is detrimental, but I am not too happy either. I will write about this in the near future (as soon as I get my first monthly payment back).

Or, toss emotions and use their default rate to manage risk. For example is better to invest in an 10% return than a 4% return if the risk is balanced by default rate. The idea is to chase the final result, not the one off gains.

However, i would be really wary of investing in some files on Prosper. When you see someone willing to pay 20% to pay Credit Card debt, watch out. Also remember that there is a credit crunch coming and today’s B can be tomorrow’s C’s quickly, especially if the file says “For CC debt!”

That’s not always the case. While I was in college my APRs shot up to 30% when companies saw that I was making minimum payments. (Even though I never pay late and definitely never defaulted on any account.) When you’re stuck in that situation you’d gladly pay real people 20%. Not only does it save the borrower in finance charges but you have a chance to appeal to people rather than being judged by a number alone. Makes perfect sense to me. I’m glad people had faith in me and I’m very happy to see them profit off of my reponsible payments.

Good point, Amanda. I was just going to comment that Micah had an APR of 29.9% on his card. *shock* Fortunately, we had the resources to take care of it right away. But I could easily see getting a loan @ 20% just to avoid the extra 10% interest.

Personally, I’d use the “ask the borrower” option on their page to straighten out a few things like the interest they’re being charged.

I hear you on being uncomfortable about debt collectors, and I’m sure many of them are unethical, but frankly if someone has money that they legitimately owe me and won’t pay me, I’ll use any method that is legal to recover it.

If you have money in a bank, part of your money is being lent out to people anyway. This just cuts out the middleman…

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